April 2014 - Posts

There’s no lack of evidence these days about prepaid cards
quickly making their way into the financial mainstream. Respected organizations
like the Pew Charitable Trusts and Fitch Ratings have recently released studies
documenting both the explosive growth
of prepaid cards and some of the reasons to explain that rise – reasons
that include a reduction in fees that now make prepaid cards increasingly
attractive compared to traditional banking products, especially checking
accounts.

While these developments are welcome news, especially to the
millions of unbanked
or under-banked Americans, the prepaid card industry is missing a huge
opportunity by not making the disclosure of fees easily accessible and simple
to understand for consumers. According
to Shane Tripcony, my partner at BestPrepaidDebitCards.com,
“We have spent a lot of time reviewing prepaid cards terms pages, and I am
happy to say that the fee information has gotten easier to find and read over
the past year, so it does seem like the industry is heading in the right
direction.”

There are a host of reasons why making information about
things like monthly account charges and the cost to add or withdraw money is
very much in the industry’s self-interest. For one thing, doing so begins to
erase the well-deserved predatory reputation prepaid cards have earned in the
past. Long the last resort for consumers who couldn’t open checking or credit
card accounts, prepaid cards were not only layered with steep fees, those fees
were very hard for consumers to locate and understand.

Besides addressing this image problem, an industry-wide
commitment to present fees in a prominent place and in a format that is easy to
navigate would also forestall any need for legislation. Earlier this year,
Virginia Senator Mark Warner introduced a bill that would require prepaid card
issuers to adopt standardized fee disclosure. While Warner’s proposal seems
like a straightforward and common sense approach, legislation always carries
with it the risk of unintended consequences. Proactively and voluntarily making
simple fee disclosure an industry norm would avoid any unforeseen problems in
the future.

Already, some prepaid card issuers are seeing the wisdom in
this. Not long ago, Chase
Liquid adopted the disclosure suggestions formulated by Pew. It was a move
that quickly won plaudits from consumer advocates like Pew as well as Senator
Warner. It wouldn’t be a surprise if consumers, too, rewarded Chase for
voluntary opting to be more transparent.

Of course, if avoiding potential legislation and
regulations while also improving the standing of prepaid cards in the public’s
eye isn’t enough, there’s yet another reason for companies to go ahead and make
it simple and easy to evaluate fees. It’s the right thing to do.

If
you grew up in the 1970s, 80s or even 90s, you’ll remember hard it could be to have a private phone call. Plenty of
households had just one phone with a cord, which made it nearly
impossible to avoid eavesdropping siblings and parents. Of course, we
all know what happened to landlines
when cell phone technology became
mainstream: Even a couple of years ago more than half
of American homes had already ditched them, a number that has certainly increased by now.

A
similar extinction awaits traditional checking accounts. Why?
The same sort of disruption that pulled the cord on millions of landlines is
already underway in the world of
personal finance, thanks to the rapid emergence and
improvement of prepaid debit
cards. The numbers alone show that checking
accounts have already begun their walk into history. Indeed, between
2009 and 2012, prepaid card transactions grew at an
annual rate of over 33 percent, with the total
number of transactions reaching 3.1 billion in 2012 alone. Fitch
Ratings recently declared that the rise of prepaid card
transactions is likely to continue.

There
are a number of reasons to believe that Fitch is right and all of
those reasons are very bad
news for checking accounts. In part, the
reason prepaid debit cards will make
checking accounts obsolete is because the accounts themselves have become less
and less attractive. Long gone are
the days when checking accounts could be counted on to be gratis. In fact, 41 percent of banks say they will not offer free checking this year, an uptick of 8 percent since just last year. To be fair,
banks are choosing to add fees in response to federal
legislation that reduced what
they could charge for regular debit card transactions and left a big hole in their revenue.

But
an even bigger reason the days of
checking accounts are numbered is significant improvements
in prepaid debit cards themselves. Long the last
resort of people who couldn’t obtain bank accounts or credit cards – the
so-called “unbanked” – prepaid debit cards were layered with outrageous fees. Some
prepaid cards are still very bad deals (especially those with celebrity
names on them) but the influx of cards from large financial institutions like American Express have
vastly improved the consumer friendliness of these products. In
fact, earlier this month the Pew Charitable Trusts released a study that found that many prepaid cards are more affordable than
checking accounts.

Besides
the fact that checking accounts can no longer be counted on to be free, prepaid
cards increasingly offer other features consumers find
attractive. Since you can only spend money that’s already in a
prepaid account, it’s impossible to either bust your budget or incur hefty
overdraft charges. According to Shane Tripcony of BestPrepaidDebitCards.com, "The
most common statement I get from current prepaid cardholders is their
appreciation for that fact that they no longer get
hit by overdraft fees with their
card. It keeps their spending in check
and does not allow for unplanned-for expenses. Some prepaid debit cards allow users to tap into a fee-free nationwide
ATM network and others permit cardholders to write checks. "The bill paying and check
writing capabilities without the threat of overdraft charges is what really
helps prepaid cardholders," said Tripcony.

Wireless
provider T-Mobile can see the writing on the wall for checking accounts. In
January the communications company jumped into financial services with the
launch of Mobile Money a combination prepaid debit card,
money management app and nationwide ATM network. For T-Mobile customers (non-customers can be
subject to more fees), Mobile Money can
be a basically free replacement for a no longer free checking account. And
in a way, isn’t it appropriate that a cell phone company is helping to hasten
the demise of a dinosaur every
bit as obsolete as a landline?

Dollar Stretcher, Inc. does not assume responsibility for advice given. All advice should be weighed against your own abilities and circumstances and applied accordingly. It is up to the reader to determine if advice is safe and suitable for his or her own situation.